When it comes to the financial industry, it seems that the problem isn’t doing something wrong, it’s getting caught. Bank of America found out the hard way that it’s better to charge shrouded fees for card replacements, overdraft protection, or monthly maintenance than levy more visible debit usage fees. And now they’ve found the easiest way to charge fees: find people who are already willing to pay them. Preferably people who are so strapped for cash that they don’t have much choice.
Regions Bank, which recently dropped its $4 debit card fee pilot, will now offer payday loans of the sort you’d normally find offered by predatory opportunists. Yes, the Ready Advance program’s terms are (slightly) better, but some of their loans come out to 120-262% APR, inclusive of fees. But let’s be perfectly clear: Regions is not rescuing its customers from irresponsible lenders. The bank is offering the same ethically dubious service, and undercutting its payday lender competitors.
A “reliable resource” that takes care to cover its a**
Regions Bank paints the program as a “reliable resource” for “unexpected expense situations” that provides its users with “added financial control.” That is the pitch. But buried at the bottom of the page:
Note: This could be an expensive form of credit. You will be charged a Cash Advance Fee of $1 for each $10 you advance. Advances taken must be repaid quickly. Ready Advance is intended to be a short-term product to meet your cash needs. It is not recommended as a solution for long-term financial needs.
A payday lender’s fees might be extortionate. But Regions’ is hardly better, and its disclosure practices suspect. It lists a fee of $1 per $10 borrowed, as well as a 21% interest rate on all unpaid balances. Taken together, this comes out to at least 120% APR – but the fees are not listed in the same place. On the Ready Advance landing page, the last paragraph lists the 10% cash advance fee, and below that, in small print, is the APR charged on outstanding balances and is assessed beginning when the loan is taken out, with no grace period.
The price of a Regions Ready Advance loan
|Paid on time||Paid in 2 months||Paid in 3 months|
|Repayment period||30 days||60 days||90 days|
If Regions goes through the trouble to say that its Ready Advance loan is not the best financial option available, and that it is not meant as a long-term financial solution, why would it promote such a suspect product at all?
Wells Fargo’s tried-and-true tactics to slam customers with fees
Regions may be one of the more recent lenders to take up payday lending, but it’s hardly the first. Wells Fargo’s Direct Deposit Advance program began in 1994, with a relatively modest 5% advance fee and a maximum credit limit of $500. Now, it charges $1.50 per $20 advanced, for a 7.5% cash advance fee. And the charges don’t stop there: if you don’t direct-deposit your paycheck to repay the loan, you’ll have to sign up for Pay by Mail, which has a $100 per incident charge. And unlike Regions, it charges a $35 late fee if its customers miss a payment. Given these high fees, if a customer makes but one misstep, the effective APR is worse than Regions.
The price of a Wells Fargo Direct Deposit Advance Loan
|Paid on time
via automatic deduction
|Paid on time via mail||Missed payment,
paid via automatic deduction
|Fees assessed||$37.50 (cash advance)||$137.50 (cash advance + setup fee)||$72.50 (cash advance + late fee)|
|Repayment period||35 days||35 days||70 days|
And both Regions and Wells Fargo find other, insidious ways to levy fees. If a direct deposit is not enough to repay the loan, the bank debits the remainder from the customer’s checking account. This can cause the customer to have a negative balance, and possibly incur overdraft fees on subsequent transactions.
Making virtue out of vice
Regions’ justification is that its customers are already using alternative financial services, like payday loans and prepaid debit cards. But those products are generally not in the customers’ best interests. For the most part, they’d be better off (sometimes substantially so) if they eschewed for-profit banks altogether. This is not a case of a bank reaching out to help its financially troubled members. This is a case of a bank realizing it’s easier to levy a fee on people already used to paying one.
Both Regions and Wells promote their payday loans as a way to bring overdrawn checking accounts back into good standing. This essentially encourages customers to take out an expensive loan to pay for overdraft charges, the overdrawn amount, and of course the charges associated with the loan itself.
Wells and Regions try to differentiate themselves from other, alternative payday lenders by touting their checks on irresponsible use. As of 2010, Wells’ curbs on long-term use include:
After using the service for 12 months, a customer’s credit limit is reduced by $100 each month until it reaches $0.
A payment plan is available that allows customers to pay in $100 increments, but customers cannot take out another advance while on the plan.
Regions has a similar payment plan restriction, and if a customer uses the Direct Deposit Advance for 9 months straight, the bank might deny him access for up to 90 days.
You’d be forgiven for thinking that these checks are insufficient. They are. Imagine that a Wells Fargo customer takes out the maximum $500 loan for 12 months straight, then sees his line of credit reduced by $100 a month. Making the generous assumption that he pays off his loans without incurring any late fees, he will have racked up $525 in fees at a 91% interest rate before he is cut off.
For the greater good?
Mainstream payday lenders argue that the customers who use the loans aren’t the type to qualify for credit cards or loans with more reasonable terms. There might be some truth to that, if we’re talking about traditional large banks. Credit unions are far more likely to lend to those with poor credit, especially low-income designated credit unions. Often, if a person doesn’t qualify for a loan outright, the credit union will work with him to build up his credit score and provide him with financial literacy training until he qualifies.
In the face of a financial institution that will not only provide loans on reasonable terms but also deliver financial education free of charge, that case becomes far less believable. The direct deposit loans charge high upfront fees and encourage unsustainable borrowing practices, and can’t credibly be billed as a service to the community.